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TOKYO (Reuters) - The yen is overvalued from a trade perspective and the reversal of the currency's strength is essential for the Bank of Japan to achieve its 2-percent inflation target, former deputy central bank governor Kazumasa Iwata was quoted as saying by a Japanese ruling party official.

The comments weigh into a growing global debate on whether it is acceptable for Japan to pursue aggressive monetary easing if it effectively drives down the yen, fanning talk of a looming currency war if other countries follow suit to help their exporters stay competitive.

Iwata, considered one of the leading candidates to replace BOJ Governor Masaaki Shirakawa when he leaves his post in March, said the dollar at 95 yen was appropriate from a trade perspective, according to the Liberal Democratic Party source.

The dollar traded around 93.50 yen on Thursday after hitting a 33-month high around 94.47 yen on Monday.

Shirakawa, who travels to Moscow this weekend for his last Group of 20 finance leaders' meeting, is expected to reinforce Tokyo's argument that its monetary expansion policies are aimed at pulling the country out of deflation, not at nudging down the yen.

Japan has said the Group of Seven rich nations accepted Tokyo's view when it declared in a statement on Tuesday that fiscal and monetary policies would not be directed at devaluing currencies.

Iwata now heads a private economic research think-tank and is not involved in policymaking, but his comments may rekindle a concerns that Japan could be targeting specific yen levels that it deemed appropriate for its struggling exporters.

The BOJ doubled its inflation target to 2 percent in January and made an open-ended commitment to buy assets from next year. That was its fourth monetary expansion in five months, taken largely in response to Prime Minister Shinzo Abe's relentless calls for bolder action to beat deflation.

Expectations of more aggressive money printing in months ahead have driven the yen down nearly 20 percent against the dollar since November (Xetra: A0Z24E - news) .

Data earlier on Thursday showed Japan's economy unexpectedly contracted for the third consecutive quarter in October-December, showing the country is struggling to escape from a mild recession and adding weight to the new government's push for more radical policy steps to revive growth.